Game Developers Are Worth a Look Following a Black Wednesday
What trade war fears were to chip stocks and Chinese tech stocks in December, Fortnite is to gaming stocks today.
Electronic Arts (EA) and Take-Two Interactive (TTWO) fell 13.3% and 13.8% on Wednesday, respectively, following disappointing reports for the seasonally big December quarter. Along the way, Activision Blizzard (ATVI) fell 10.1% ahead of its Feb. 12th Q4 report, and Sony (SNE) , Nintendo (NTDOY) , French game developer Ubisoft (UBSFY) and Chinese developer/Activision partner NetEase (NTES) also saw sharp declines.
EA beat EPS estimates, but missed revenue estimates and reported an 18% annual drop in net bookings. The company also issued March quarter guidance that was well below consensus, with revenue and bookings guidance each implying 7% annual drops.
With the help of a strong reception for Red Dead Redemption 2, Take-Two beat estimates and reported its net bookings more than doubled annually to $1.57 billion. But the company also issued below-consensus March quarter guidance; bookings guidance of $450 million to $500 million implies growth relative to year-ago bookings of $411 million, but is also below a $616.7 million consensus.
The F-word -- Fortnite -- is easy to find within analyst and media reactions to EA and Take-Two's reports. Worries that Epic Games' wildly popular, free-to-play, battle royale title, which topped 200 million registered users (not the same as active users) in November, is eating into demand for paid console and PC titles have hit a fever pitch. Somewhat less popular Fortnite rival PUBG also gets a mention here and there.
There's no denying that Fortnite -- cartoon-like graphics, gentle learning curve and all -- has been a groundbreaking title in multiple respects, from its creation of a compelling cross-platform gaming experience that includes mobile devices, to the amount of revenue it has generated from PC and console gamers using a free-to-play model, to the way it has become a social venue for gamers. And EA CEO Andrew Wilson did name-drop Fortnite (along with Red Dead Redemption 2 and Call of Duty: Black Ops 4) when talking about the tough competitive environment his company is facing.
However, just as investors in chip stocks and Chinese tech stocks were overreacting in late 2018 to Chinese trade and macro pressures -- even if those pressures are indeed having some impact on near-term sales -- investors in console and PC game developers seem to be overreacting by treating Fortnite as a doomsday event for a massive industry that encompasses everything from sports games to fighting games to advanced first-person shooters.
It's also worth keeping in mind that other factors are hurting the sales of one of more developers -- EA, for example, has been hurt by a weak reception for Battlefield V, and the age of the current game console cycle is hurting console developers in general. And while it would be foolish to dismiss Fortnite as a fad, it's also not guaranteed that the game will maintain its current, sky-high, level of popularity -- especially as EA and others roll out Fortnite rivals.
At the same time, the PC/console gaming still presents a secular, growth story, as the amount of weekly time spent playing games continues to grow and revenue streams such as gaming subscription services, digital content sales and eSports events help grow the addressable market. In addition, looking at the next 2-to-3 years, hardware advances should also provide a lift to growth, as Microsoft (MSFT) and Sony launch next-gen consoles and more PC games supporting real-time ray tracing (enabled by Nvidia's NVDA latest gaming GPUs) arrive on the scene.
EA and Take-Two now each trade for 18 times their expected fiscal 2020 (ends in March 2020) EPS, and Activision for 17 times its expected 2019 EPS. Though those aren't exactly rock-bottom multiples, they also don't look excessive, given the gaming industry's long-term outlook and the value of the gaming franchises and intellectual property that they possess.
Skyworks and Microchip Think The Bottom Is Close for Chip Sales
Feb 5, 2019 | 5:47 PM EST This earnings season has been pretty good to chip stocks, as a slew of chip developers and equipment makers issued guidance that (though often below consensus estimates) was better than feared. RF chipmaker Skyworks (SWKS) and microcontroller (MCU) and analog chipmaker Microchip Technology (MCHP) have helped keep the party going on Wednesday.
Skyworks, a major chip supplier to Apple AAPL, Samsung and Chinese smartphone OEMs, rose over 11% on Wednesday following its December quarter report. The gains have come even though revenue and EPS were in line with the guidance given in Skyworks' Jan. 8th warning -- it shortly followed Apple's sales warning -- and March quarter revenue guidance of $800 million to $820 million is below an $850 million consensus and implies a 12% annual drop at the midpoint.
Microchip rose over 7% following a mixed report. The company beat December quarter revenue and EPS estimates, but also issued below-consensus March quarter guidance, with sales expected to be up 2% to down 9% sequentially (annual comparisons are skewed by Microchip's 2018 acquisition of Microsemi).
The Philadelphia Semiconductor Index (SOXX) rose 2.7% following Skyworks and Microchip's reports. It's now up over 15% in 2019, after getting clocked in Q4 2018.
Needless to say, low expectations and valuations are big reasons why Skyworks and Microchip rallied post-earnings. In spite of their near-term earnings pressures, Skyworks still only trades for less than 13 times a fiscal 2019 (ends in Sep. 2019) EPS consensus of $6.64, and Microchip for slightly over 13 time a fiscal 2020 (ends in March 2020) EPS consensus of $6.74. In Skyworks' case, a new $2 billion stock buyback authorization (it replaces a $1 billion authorization that had $129 million left on it) is also helping.
However, each company -- and for that matter, their peers -- seems to be getting a boost from earnings call remarks that suggest the March quarter could represent a bottom for demand. Microchip CEO Steve Sanghi, whose company was one of the first firms last year to report seeing Chinese sales pressures, says Microchip thinks this quarter will "mark the bottom of the cycle" for it, provided there's no "material negative development on the trade front."
"With the 120,000-plus customers that we service in a vast range of end-markets and applications, we really believe that we get a very broad perspective of what is happening in our business," Sanghi added. "Today, these indicators are telling us that the environment is still very uncertain...However, we don't see things getting worse at this point unless something more negative occurs on the trade front."
For his part, Skyworks CEO Liam Griffin forecast his company's June quarter would be "flattish, maybe up a little bit," and (with the help of a seasonal pickup in demand, aided by new phone launches) that growth would be stronger in the following two quarters.
In addition, though Skyworks' total revenue fell 8% due to lower phone chip sales, its "Broad Markets" revenue, which now accounts for 27% of total revenue and covers chips going into products such as mobile base stations, cars, broadband modems and smart home/IoT devices, grew by a double-digit percentage. Echoing positive remarks made by the likes of Texas Instruments (TXN) and Xilinx (XLNX) about their mobile chip sales as 5G rollouts commence, CFO Kris Sennesael noted the segment's sales to the mobile infrastructure market were strong, as were its wireless connectivity and auto chip sales.
Skyworks' Broad Markets likely bodes well for RF chip rival Qorvo (QRVO) , which gets about a quarter of its revenue from products other than mobile devices. Qorvo, which warned in November, rose 3.9% on Wednesday ahead of a December quarter report that arrives on Thursday afternoon.
Why Apple Might Have Shaken Up Its Retail Leadership
Feb 5, 2019 | 12:40 PM ESTAs many readers likely know, Apple ( AAPL) announced on Tuesday that retail chief Angela Ahrendts will be leaving in April. She'll be replaced by Deidre O'Brien, who has overseen Apple's HR functions and (under a new title of SVP of Retail + People) will now be in charge of both HR and retail.
Ahrendts, who was once the CEO of fashion retailer Burberry, was a well-respected figure even before she joined Apple in 2014. And her stature definitely didn't worsen over the last five years, as Apple gradually increased its retail store count, foot traffic and online and offline retail sales. Ahrendts' tenure has also seen the launch of the Today at Apple program, which provides free teaching sessions for users of Apple hardware and has generally been well-received.
Meanwhile, naming O'Brien as Ahrendts' de facto successor is bound to raise some questions about how smoothly the transition will go -- both because O'Brien's background is in HR and operations rather than retail, and because she'll be maintaining her existing responsibilities on top of overseeing Apple's 70,000 retail employees.
But as some of the reactions to Ahrendts' departure have noted, there have been points of friction, particularly around long wait times for making purchases and obtaining customer service at popular stores. Long-time Apple bull Gene Munster thinks Ahrendts' focus on integrating Apple's online and offline retail experiences "in some ways took the focus away from an excellent in-store experience" (see Jim Cramer's take here).
And certainly, the timing of the leadership change is interesting. Apple is coming off a December quarter in which (thanks in large part to Chinese pressures) its iPhone revenue fell 15% annually, and its total revenue 5%. The December quarter was also one in which (as noted by Bloomberg) Apple stepped up its promotional activity in a way that Ahrendts has generally been averse to, hiking and strongly promoting its iPhone trade-in offers, instructing technicians to recommend iPhone upgrades to users with out-of-warranty devices and discounting the standard iPad at third-party retailers (but not Apple's own stores).
For all these reasons, Apple may have concluded after the holiday season that the timing is right for a retail leadership change.
